The CLS team is glad to present our explanations on the mechanisms for doing business in Russia, with an accent on minimum public disclosure of information regarding the foreign investor.

We do note that it is difficult to achieve complete anonymity of a foreign investor in Russia due to the legal requirement to disclose information on end beneficiaries to the state authorities.[1] However, such disclosed information is not made public. We therefore propose a structure for doing business that allows to rule out information about an investor becoming known to third parties (including competitors, suppliers and the media) and appearing in publicly accessible sources.

1. PARTICIPATION IN A RUSSIAN COMPANY

The most common way to do business in Russia is through shareholding in a legal entity. This is done through founding a new company or buying shares in a legal entity with an operating business.

Creating a new legal entity ensures full control over the formation of its structure, although involves a complex registration procedure that includes the need for the founder to be present in Russia in person, along with collection of documents, payment of state fees and submission of the documents, as well as potential expenditures tied to entering the market, depending on a particular business – for example, the need to obtain a license or other permit documentation, while acquiring an existing company speeds up the commencement of business, but could involve substantial capital contributions.

The most common legal forms for legal entities doing business in Russia are the following: (i) limited liability company (LLC) and (ii) joint stock company (JSC) in the form of a non-public joint stock company (NPJSC) or a public joint stock company (PJSC).

The LLC and the NPJSC allow for flexible corporate management and involve an insignificant number of requirements for the process of doing business. By contrast, conducting business through a PJSC implies compliance with a greater number of requirements, including the requirement for a public offering of shares on a specialized stock exchange, an increased amount of charter capital (RUB 100,000 (about CNY 9,200) for PJSC; RUB 10,000 (about CNY 920) for NPJSC and LLC), as well as an additional requirement to disclose certain information.

See below for more detailed comments on structuring a business using LLCs and JSCs.

1.1. Doing business through an LLC

Information on the founders/shareholders of LLCs is available to the public in the Unified State Register of Legal Entities (the “Companies Register”). If business is done through an LLC, then in order to ensure confidentiality the shareholding in the Russian company can be structured through third parties by providing mechanisms that allow the investor to exercise effective control over the LLC's activities. Such third parties may include a subsidiary registered in a jurisdiction friendly to Russia or an affiliated entity. This way, the Companies Register will show information only on the actual owner of the shares in the LLC, without identifying the beneficiary.

Foundation of a subsidiary will create a middle link between the foreign investor and the Russian LLC, thereby ensuring confidentiality of its beneficiaries. This structure will allow the investor to manage the business in Russia through the subsidiary’s executive bodies. At the same time, one should take note of the need to carefully select the jurisdiction for registering such a subsidiary and to ensure that its activity complies with the local laws.

Additionally, Russian law offers a variety of effective mechanisms for structuring the holding of interests in LLCs, which can ensure the necessary confidentiality for a foreign investor (e.g. corporate agreement, buyout agreement or share pledge agreement).

1.2. Doing business through a JSC

Doing business through a JSC ensures confidentiality for its shareholders, since information on shareholders of a JSC is not indicated in the Companies Register.

At the same time, depending on the type of JSC, the disclosure of information on shareholders involves the following nuances:

1.2.1. If the NPJSC has a single shareholder, information about it must be reflected in the Companies Register. The NPJSC itself is responsible for making sure the relevant information is recorded in the Companies Register.

To ensure the confidentiality of information, additional provisions may be made for:

1. Management of shares through nominee holders. A nominee holder is a professional participant of the securities market who exercises rights to shares on behalf of the ultimate beneficiary on the basis of a nominee account agreement. Consequently, the register of JSC shareholders will show a nominee holder of shares rather than an actual investor.
2. Participation of two shareholders in a NPJSC by distributing the shares in such a way that the foreign investor gets the majority share and the minority share is held by a trusted individual. In this case, information on the foreign investor as a shareholder of the Russian company will not be publicly available, yet the investor will retain control over the NPJSC.

When making the choice between an NPJSC and an LLC, one should note the requirement for an NPJSC to issue shares, as well as the requirement to disclose information on activity of the NPJSC if it has more than 50 shareholders, namely, the obligation to publish an annual report, annual accounting/financial statements and information on acquisition of more than 20% of shares in other companies). In addition, if an NPJSC makes a public offering of bonds or other securities, the company must disclose information on its affiliates – same as a PJSC.

1.2.2. A PJSC is also subject to the requirement to disclose information in the Companies Register about a single shareholder. Additionally, due to a PJSC’s public status, it is obliged to disclose an extensive range of information on its activity, which includes not only the company's financial results (annual report, annual accounting/financial statements), but also information on affiliates, which may allow to identify the ultimate beneficiaries of the PJSC’s shares.

We should note that in cases provided by law, the registrar that maintains the register of shareholders of a JSC, as well as the depositary possessing information on the ultimate beneficiaries of a JSC, must disclose information on the shareholders – for example, at the request of a shareholder, nominal holder, the issuer itself, state bodies and the Bank of Russia.[2] In practice, courts, including commercial arbitration courts can send such queries, as well as preliminary investigation and internal affairs authorities as part of investigation activities.

2. CREATION OF A JOINT VENTURE

Doing business in Russia is also possible together with a partner by creating a joint venture. Such a venture can be organized by (i) registering a separate legal entity or (ii) signing comprehensive agreements. In the first case, confidentiality of the foreign investor’s participation can be ensured through structuring the ownership as described above, and in the second, by signing various agreements with the partner, which will allow to do business without disclosing the identity of the foreign investor for contracting parties. For example, the partners could sign an agency agreement or a commission agreement under which interaction with contracting parties will be on behalf of the Russian partner, but at the foreign investor’s expense.

Creating a joint venture with a Russian partner will ensure a broad client base, a market to sell on and a worker pool for the new business. In addition, creating a joint venture with a partner that is highly recognizable on the market will ensure informational coverup of the foreign investor’s presence.

3. PARTICIPATION IN A CLOSED-END FUND

The best tool for ensuring confidentiality of investments in Russia is participation in a closed-end fund (CEF). A CEF is a property complex belonging to one or several persons, managed by a licensed management company which represents the fund: acquires assets (real estate, shares in private companies or securities), performs corporate management and interacts with the state authorities, thereby ensuring confidentiality of the foreign investor’s holdings from third parties. Under Russian laws, information on the investors of a CEF is not to be made public, except in cases directly specified in the law. Each investor of the fund holds an investment share certifying the right to receive income gained from the management activity with the fund’s property.

Please note that such a structure is aimed more at investing into an indefinite pool of assets for purposes of gaining income or a project requiring significant financing, rather than at engaging in active business. For example, today CEFs are actively used to invest in commercial or residential real estate, as well as developer projects. However, such a structure entails paying remuneration to the management company and the investor losing operational control over the investments.

4. ESTABLISHING A PERSONAL FUND

An alternative form of participating in an analog of a CEF is the creation of a personal fund, that is, a non-commercial legal entity consolidating the investor’s property exceeding RUB 100 million (about CNY 9 million). A personal fund can engage in business, including creation of subsidiaries and participation in them. For example, a foreign investor can transfer money or real estate to the personal fund and thereafter control this property through participation in the personal fund management bodies.

The key benefit of a personal fund is the high level of confidentiality, since information on the founder is not public, and, unlike a CEF, the personal fund allows the founder to retain control over the asset management.

However, the founder cannot be the beneficiary of the fund’s activity, unless otherwise stated in the personal fund’s charter, and commercial legal entities also cannot be beneficiaries. At the same time, the founder bears subsidiary liability for the fund’s obligations in the first three (3) years of the fund’s existence. Once this term expires, the founder is no longer liable for the fund’s obligations, while still able to manage its activity.

Each of the methods described has its benefits and requires an individual approach in order to adapt to particular needs. If required, the CLS team will be glad to make a detailed analysis of your wishes and propose the best manner for you to do business in Russia.

This review was prepared by the CLS corporate law practice – senior associate Natalia Ryabova, associate Vadim Strushko, associate Irina Kocherova and paralegal Sofia Barinberg.

Should any questions arise in connection with the above or if you need any additional materials, please contact the CLS office in St. Petersburg or Moscow.

This information letter keeps clients of CLS and other interested parties abreast of information that may, to some extent, affect their activity or cater to their interests. The opinions and commentaries expressed in this information letter shall not be deemed legal advice and do not cancel the need to obtain legal advice or legal opinion on separate issues.

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